Chicago Music Exchange rakes in millions by treating its workers like rock stars

Search “guitar riffs” on YouTube, and you’ll find a muscular dude in a Chicago Music Exchange T-shirt plowing through 100 of the most recognizable licks in rock ’n’ roll history. In one take, Alex Chadwick, 29, works seamlessly from the 1954 classic “Mr. Sandman” all the way to St. Vincent’s 2011 hit “Cruel.” It’s transfixing, virtuosic, an exercise in tip-of-the-tongue recognition.

According to David Kalt, the man who employs Chadwick, that clip — and its 7 million views — also represents the future of retail.

Kalt is the owner of the Chicago Music Exchange, a guitar shop in Lakeview. A former trader, Kalt made his fortune by co-founding optionsXpress in 2000. Charles Schwab bought the retail brokerage firm in 2011 for $1 billion.

Looking at a heap of money and decades until retirement age, Kalt purchased the Chicago Music Exchange in 2010, as the weak economy was bleeding consumers’ discretionary income and e-commerce was chasing entrepreneurs away from brick-and-mortar businesses. “The concept of selling products based on price and availability is a dying business because it’s just a race to the most efficient, where Amazon can kill just about anyone,” Kalt says. “So how do you figure out how to be a great retailer and deliver an experience that makes customers feel a certain way?”

Kalt appears to have landed on a formula. He pays his people well, shells out for a full-time videographer and blogger, carries a ton of inventory, and has a gleaming showroom where browsing is encouraged. That approach has yielded results not often seen in the retail world — 243 percent growth in four years, from $3.5 million in revenue in 2010 to a projected $12 million by the end of this year. And he’s making money too. Kalt expects the business will net between $500,000 and $800,000 this year.

Chicago Music Exchange’s success comes as competitors, both large and small, are watching margins tighten amid growing online sales, big-box competition and a market flooded with cheap imports. An IBISWorld report pegs profit in musical instrument sales at a razor-thin 1.7 percent, down from 2.4 percent in 2008.

Kalt attributes much of his growth to his investment in the store’s online video channel, where 348 videos have garnered 12 million views. For every $100,000 Kalt spends on video, he reckons that he garners between $700,000 and $800,000 in revenue. “Our videos sell guitars, but they also promote guys in the store as real personalities, promote their store experience,” Kalt says. “We’re trying to connect the dots between the instruments we sell and the people who play them.”

“Most of the guys here have shot videos,” says Chadwick, who plays a duet with Wilco frontman Jeff Tweedy in another video. “Man, it’s so much fun. You just feel like a rock star. And it’s recognition for everyone in the store.”

Kalt’s employees have more than 3,000 guitars to choose from; 1,500 of those are on display and available for customers to play, including a $17,000 1964 Fender Stratocaster and a 1960 Gibson ES335 priced at $18,000. That selection helps make CME a destination — only a third of its sales come from customers who live within 10 miles — and insulates it from online pressures. “You wouldn’t buy a car online,” says Josh Noble, a customer from Logan Square who’s been shopping at the CME for six years. “I spent two hours here, probably played 15 guitars before I found my Fender.”

While carrying a ton of inventory is considered a liability in most corners of the retail world, Brian Majeski, editor of Music Trades Magazine, says it’s a necessity in Kalt’s line of work, where product moves slower and demands are more specified.

“In the guitar business, to sell a guitar, you need a lot of inventory,” Majeski says. “If [a store is] doing a really, really, really good job, they’ll turn their inventory 2½ times a year, so you have to have a big inventory.”

Kalt estimates his inventory turns over twice that often. He also pays his salespeople more than twice the industry average of $21,887 a year, according to IBISWorld. “The only way to make money doing this is to create careers for my guys. A lot of the people who are in the minimum-wage situations, they’re working for someone else,” he says. “I think it comes back to not a lot of retailers out there thinking about growth. If the tide rises and business can grow, why can’t you pay your people more?”

Since taking over, Kalt has grown his payroll on pace with revenue, almost quadrupling the number of CME employees to 30. In spite of swelling numbers, he’s seen little in the way of turnover — only two workers have left or been fired since 2010.

“I’m making more money than I was working a desk job for a Fortune 500 company, which is good. You’re not supposed to make any money at a music store,” says Joel Bauman, 29, who plays guitar for “sci-fi yacht metal” band Royale when he’s not working the floor at the CME.

Rather than employing a system of hard-and-fast sales incentives, Kalt meets with each member of his floor team monthly to determine compensation. “You get credit for doing a video, for doing an event, for building a rock-star relationship,” he says. Bauman’s relationship with Mumford & Sons — Marcus Mumford gave Bauman $10,000 worth of Lollapalooza passes — earned him a bonus.

Those methods keep salespeople satisfied and enable customers to browse in peace. “I’m a salesperson and I hate salespeople. I really, truly don’t give a shit if you buy anything as long as you have fun and tell your friends. That’s worth more in the long run,” Bauman says. “A good month, everyone gets hooked up. We always get taken care of.”

Lower turnover means that Kalt’s salespeople have time to develop an encyclopedic knowledge of the inventory. Chadwick can name the make, model, year and specs of any of the 1,500 guitars on display. (This reporter tested him.) “It’d be a lot more difficult if people were being paid $8, $9 an hour. Part of what [Kalt’s] doing is making sure employees are invested in the company as an idea,” he says. “I’m in a much better position than when I started.”

Natalie Everett, a retail analyst for IBISWorld, says the compensation scheme at Kalt’s store resembles Apple’s. “This is a blossoming trend in retail. A lot of employers are seeing the benefit of having their employees happy and sticking around a long time and being knowledgeable about products,” she says. “The more niche industries especially, [customers] expect more.”

For Bauman, the CME is as niche as it gets: “I work at the Gold Coast Ferrari dealership of guitar stores.”

Photo of David Kalt by Heath Sharp